Lodgers and tax liability

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.

More people are welcoming lodgers into their spare rooms as a way to earn a little extra cash each month.

As with any money you make, though, the taxman will want his slice. This article is a brief guide to the tax liabilities you incur when taking in lodgers – but first things first:

Lodgers – the basics

If you rent out part of a property that’s your main or only home, you’re known as a ‘resident landlord’. You have fewer obligations than a landlord who lets out a whole buy to let property – you still have to keep the property in good repair, but you don’t have to give notice as far in advance and your tenant can’t dispute the level of rent you’ve agreed upon.

Excluded occupiers live in your home and share a facility or living space with you or a member of your family. You won’t have to go to court to evict an excluded occupier, and usually only have to give the rental period in notice.

However, if your lodger doesn’t share any living space with you, they’re likely to have basic protection. This means that you need to give them written notice to quit, usually at least four weeks in advance, and need to get a court order to evict them if they don’t leave.

The ‘Rent a Room’ scheme allows you to earn a certain amount of rent from a lodger per year without having to pay tax, which brings us to…

Income tax and lodgers

If you’re letting a room or whole floor to a lodger you can earn up to £7,500 per year without paying tax. If you’re letting jointly – say with a partner – the threshold is halved for each of you, so you can’t craftily double your tax-free allowance.

The exemption is automatic, so you won’t need to do anything if you earn less than this amount. If you earn more, however, you’ll need to declare it on your tax return (or fill one in if you don’t normally do so).

Capital gains tax and lodgers

The tax-free earning threshold is an enticing reason to let out a spare room to a lodger, but if you’re not careful, letting to lodgers might incur you the wrath of another type of tax – capital gains.

Ordinarily, people selling a property they’ve always lived in will qualify for private residence relief, meaning they won’t pay any tax on profits they make on the sale of their home. This will still be the case if you’ve only had one lodger at any one time. But if you’ve had more than one lodger, HMRC will consider you to have been running a ‘lodging business’, and you may have to pay capital gains tax on the part of the house that you let out, for the time you let it.

Remember, if you’re in any doubt about whether you are or aren’t liable to pay tax, contact HMRC – there’s a fine line between earning a little extra each month and running a business, and it always helps to be sure that you’re on the right side of it.